Google: Expecting Profit Margin Expansion, Quarterly CapEx Higher Than Q1 (1Q24 Earnings Call Summary)

Below is the summary of the first quarter financial report conference call for $ Alphabet(GOOGL.US) in 2024. For a detailed interpretation of the financial report, please refer to [Google Soaring? Learning from Meta, Striving to be the Best](Article Link: https:/longportapp.cn/zh-CN/topics/20749920) .

1. Review of Key Financial Information:

2. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Executive Statements:

1) Overall Review:

a) Business Growth: Over the past six years, Google's annual revenue has grown from $100 billion to over $300 billion.

b) Strong Performance of Search, YouTube, and Cloud Services in Q1. It is expected that by 2024, YouTube and Cloud Services will achieve a combined annual revenue of over $100 billion (including subscriptions).

c) Innovation: Launched the significantly improved Gemini 1.5 Pro, including breakthroughs in long text comprehension; developed new AI models and algorithms, achieving over 100 times efficiency improvement; customized TPUs have evolved to the fifth generation, powering AI projects; introduced generative AI to main search result pages through SGE and search experiments.

d) Global Product Layout: Six products with over 2 billion monthly users, including 30 billion Android devices. Fifteen products with over 500 million users, operating in over 100 countries.

e) YouTube: Viewers watch over 1 billion hours of YouTube content on TV daily; In Q1, global paid music and premium subscribers on YouTube have exceeded 100 million, including trial users, while YouTube TV now has over 8 million paid subscribers.

f) Waymo: The number of passengers using fully autonomous services in San Francisco and Phoenix continues to grow, with high customer satisfaction, and we have started offering paid rides in Los Angeles and testing limited passenger trips in Austin.

g) Google I/O conference and other marketing activities will showcase more innovative products and services.

2) Q1 Business Performance:

a) Segment Revenue Performance: Google Services revenue reached $70 billion, a 14% year-on-year growth; Search and other revenue grew by 14% year-on-year, led by growth in the retail industry vertical, with strong performance from retailers in the Asia-Pacific region;YouTube ad revenue increased by 21% year-on-year, driven by growth in direct response ads and brand ads; network revenue decreased by 1% year-on-year; subscription, platform, and device revenue increased by 18%, driven by YouTube subscription growth.

b) Product enhancements and feedback: The Gemini model is integrated into Performance Max (PMAX), increasing the likelihood of advertisers running high-quality ad campaigns by 63%, with advertisers achieving an average of 6% more conversions with excellent ad intensity; ACA-adopting enterprises saw a 5% increase in conversions in search and PMAX ad campaigns with similar conversion costs per conversion; advertisers like to interact with new and existing customers to drive purchase consideration, with Liongate's tests showing an 85% increase in efficiency in demand generation click costs and a 96% increase in efficiency in page view costs; ads next to search results in SGE in March showed these ads were helpful to users.

c) Retail was the main contributor in Q1, focusing on driving profitability and growth for retailers, such as IKEA utilizing Google's in-store sales metrics, leading to a significant increase in omnichannel revenue.

d) YouTube: Growth in the number of creators and short video channels, with the YouTube Partner Program paying creators over $70 billion; strong performance in direct response ads and brand ads, improvement in short video ad monetization; new program lineup including short video ads in sports, beauty, fashion, lifestyle, and entertainment.

3) Q1 Financial Performance:

a) Total revenue of $80.5 billion, a 15% year-on-year increase, 16% growth at constant exchange rates, with search being the largest contributor to revenue growth.

b) Total expenses reflect $2.6 billion in restructuring costs for Q1 2023 and $716 million in employee severance and related costs for Q1 2024.

c) Other cost of revenue of $20.8 billion, a 10% increase, mainly due to increased YouTube content acquisition costs.

d) Operating expenses of $21.4 billion, a 2% decrease, reflecting lower sales and marketing expenses and increased R&D expenses; adjusted operating expenses increased by 5% year-on-year, mainly due to increased R&D expenses and cloud sales compensation expenses.

e) Operating profit of $25.5 billion, a 46% increase, with an operating profit margin of 32%; adjusted operating profit increased by 31%, with an operating profit margin of 33%; net income of $23.7 billion, earnings per share of $1.89; free cash flow of $16.8 billion (Q1), $69.1 billion (past 12 months); cash and marketable securities of $108 billion.

f) Segment revenue: Google Services revenue of $70.4 billion, a 14% increase; Google Search and other ad revenue of $46.2 billion, a 14% increase; YouTube ad revenue of $8.1 billion, a 21% increase; network ad revenue of $7.4 billion, a 1% decrease; subscription, platform, and device revenue of $8.7 billion, an 18% increase;Google Cloud revenue was $9.6 billion, up 28%, with an operating profit margin of 9%; Other Bets business revenue was $495 million; operating loss was $1 billion; Traffic Acquisition Cost (TAC) was $12.9 billion, up 10%; Google services operating revenue was $27.9 billion, up 28%, with an operating profit margin of 40%.

g) The leap year contributed slightly more than 1 percentage point to the revenue growth rate in the first quarter; The impact of foreign exchange rates is expected to face greater adverse effects in Q2 compared to Q1.

h) The decrease in the number of employees on a quarter-on-quarter basis reflects the layoffs and slower hiring pace in the past few months.

i) Capital expenditures in the first quarter were $12 billion, mainly used for technology infrastructure investments, with server components being the largest, followed by data centers; Capital allocation increased quarterly dividends to $0.20 and added $70 billion in stock repurchase authorization.

j) Outlook: It is expected that the company's full-year operating profit margin will expand in 2024 compared to 2023; capital expenditures for the full year are expected to be roughly equal to or higher than the first quarter level, and the timing of cash payments may lead to changes in capital expenditures in quarterly reports.

2.1 Q&A Analyst Q&A

Q: With the continuous emergence of new participants in the e-commerce field, has there been a change in the growth trend of commercial queries? In terms of controlling expenditure growth, what areas still have optimization potential or ongoing workflow?

A: Monetization usually follows when organic search performs well. Therefore, the trends we observe can usually continue well. With the development of generative AI and AIO views in search, it is expected to expand the scope of such queries to better serve users and answer more complex questions, and this trend seems to apply to all query categories. Although still in the early stages and will prioritize user experience, we are optimistic about this transformation.

We are very focused on continuing efforts to slow down the rate of expenditure growth, including persistently restructuring the cost base. We are aware of the challenges posed by increased depreciation and expenses related to higher capital expenditures, so these efforts are ongoing, including determining product and process priorities, improving organizational efficiency and structure, etc. The work of combining equipment with services and platforms with ecosystems is not only a good example of improving product quality and user experience but also enables us to work at a higher speed and efficiency.

Improvements in technology infrastructure, optimizing internal operations through AI, procurement work with suppliers and sellers, and office space optimization, these are ongoing workflows that fall under the category of persistently restructuring the cost base.

**Q: So far, where does the Search Generation (SG) feature work best in which queries or scenarios, and what is the pace of introducing more of these features into core search in the future? Can the $12 billion capital expenditure in the first quarter be used as a reasonable reference for the remaining time this year, and should an increase in capital expenditure be expected next year as well?A: We are seeing preliminary evidence that SGE is able to expand the scope of queries, providing users with a innovative way to access a mix of factual answers, web links, and various viewpoints. We have already launched the AI summary feature in the United States and the United Kingdom, mainly targeting more complex queries, and we believe SGE will significantly improve the user experience. We have processed billions of queries and have seen this improvement span across multiple categories. However, we are still continuing to test and will make decisions based on metrics. We will continue to improve and develop SGE this year.

We expect quarterly capital expenditures for the full year to roughly remain at or above the first quarter's $12 billion cash capital expenditure level. While quarterly capital expenditures reported may fluctuate due to the timing of cash payments, they are expected to generally be maintained at this level or higher. We are highly committed to making necessary investments in technical infrastructure to support the growth of cloud computing, as well as innovation in search and Gemini. The majority of capital expenditures are allocated to technical infrastructure. We anticipate that investments in office facilities in 2024 will account for less than 10% of total capital expenditures, similar to 2023 but still present. As for 2025, it is too early to provide more information at this time.

Q: In this era of frequent technological innovation, how can large enterprises find opportunities and address challenges in operational scale, while balancing investment in growth and maintaining profitability to drive organizational progress?

A: The transformation with AI is a rare opportunity, and Google has been preparing for this for a long time, continuing to leverage its scale advantage in research and innovation. AI can impact various aspects of a company horizontally, such as search, YouTube, cloud computing, and Waymo, and we see rapid progress in innovation in these areas. This leverage has great potential and is a true opportunity for the future. In terms of challenges, ensuring efficient utilization of this opportunity is key, and the company has been driving a shift in mindset to ensure embracing opportunities while maintaining efficiency. This includes reallocating resources to the company's highest priorities and leveraging the experience gained over the past 20 years in improving machine efficiency to make the most effective use of funds.

Q: YouTube Shorts has been running ads for nearly two years now, and despite providing updates on revenue growth, considering that YouTube has released a series of ad products and automation tools to help advertisers adapt to vertical screen ad production, how have these measures been received and recognized by advertising clients? Based on observations over the past two years, are there any structural reasons why YouTube Shorts' ad revenue cannot match traditional horizontal screen ad revenue levels?

A: YouTube's overall performance is strong, especially on Shorts, where Shorts ad revenue in the United States has doubled relative to streaming views in the past 12 months, which we are very pleased with. Advertisers will only invest when they see a positive return on investment, so the growth in Shorts ad revenue indicates that this is effective for advertisers in both the short and long termOverall, Shorts is a long-term investment for the company that meets the needs of creators and viewers for short videos, and it has shown strong performance with a daily viewing volume of 70 billion times and a 50% year-on-year increase in the number of uploaded channels. Regarding the issue of whether there are structural reasons causing Shorts' advertising revenue to not match that of horizontal screen advertising, it is currently difficult to see such structural reasons.

Q: In the past two quarters, there has been a significant increase in capital expenditures, and you have been investing in the AI field for many years. Is this increase due to improvements in GPU (graphics processing unit) and related technologies that led you to decide to increase investment? Considering the returns in advertising and cloud computing, do you think the current capital expenditure is a higher operating cost, or can it lead to higher returns than in the past?

A: The increase in capital expenditures reflects opportunities the company sees in multiple areas, including supporting the work of the Gemini base model, business needs of cloud computing customers, the growth of GCP, and infrastructure development. In addition, search, YouTube, and broader services are also applying related technologies. This investment not only helps enhance the company's computing capabilities to support various businesses but also provides opportunities for more services and products, thereby bringing new revenue opportunities. The company is very focused on monetization opportunities and is committed to improving efficiency in providing computing capabilities from hardware to software and all aspects.

Q: Is it possible for AI systems to cause a step change in search volume or usage scenarios outside the Google environment? Regarding the comments on YouTube and Cloud businesses reaching a $100 billion revenue scale, what factors is this expectation or outlook based on? Is it influenced by changes in Cloud demand or step changes in GenAI workload demand?

A: The current moment is a positive one for search engines as it allows for profound improvements and developments in search engine products in multiple aspects. Search engines provide a unique experience where users can get answers, explore more content, and access viewpoints from across the web. To maintain this innovation and meet user needs, the company has been engaged in long-term construction. The company has excelled in its innovative path in this regard, hence holding an optimistic view and considering it a positive moment.

We are talking about the continued growth momentum and strong performance in the business. What we want to convey in our comments is that over time, we have built a strong business, and this is just one way to measure it. We had similar comments in the previous quarter, where we talked about subscription services. We are very proud of the work done by the entire company team, as they are creating new powerful opportunities to serve our users, customers, and advertisers in a profound way. This is just a way to measure the scale of the business we have built over the yearsQ: What are the opportunities and constraints for GCP in continuing to explore the huge market and accelerate growth? Are these opportunities and constraints more related to sales, products, solutions, or both? How does GCP plan to address these issues, primarily through organic growth or by considering partnerships? What is YouTube's view on further purchasing live sports broadcasting rights? Currently in the United States, some major league rights are about to expire, with more in the coming years. Besides NFL Sunday tickets, what is your overall strategy?

A: In cloud computing, AI transformation is driving a rethinking of the entire technology stack, leading to an important turning point for cloud computing. GCP has a rich set of models and a wide range of choices, as well as features related to workplace productivity, providing many opportunities for GCP. GCP will seize these opportunities through organic growth and a strong partner program. However, cloud computing also faces some challenges, such as switching costs and how to make it easier for customers to migrate to the cloud. GCP is continuously investing to simplify the process of customer migration to the cloud.

Regarding sports rights, GCP has long-standing and important partnerships with the world's most popular sports leagues, federations, teams, athletes, and broadcasters. These partnerships, combined with GCP's large sports fan audience, drive investments in various products and subscription experiences, such as NFL Sunday tickets, YouTube TV, YouTube Primetime channel, etc. However, there are currently no new sports rights acquisition plans to announce. GCP is constantly looking for opportunities to create more value for users, advertisers, and creators, but there is no specific news to share at the moment.

Q: Google is providing new AI interactions and search features for Pixel and Samsung devices, and there is speculation that Gemini may be used on iOS in the future. If users start searching on smartphones, and these searches are essentially completed on the device model without accessing the network, how does Google plan to monetize these smartphone-based and edge-running behaviors?

A: For AI searches based on smartphones, although some use cases can be completed on the device, most users still need access to rich cloud and network resources. Google has provided users with more convenient ways to access search through collaborations with Samsung and features like Circle to Search. From a privacy perspective, some needs can indeed be met on the device side. However, people often need to access the cloud to get more information and functionality. Therefore, the coordination between device and cloud usage is not the key factor for users to choose a service; users are more concerned about whether the service is convenient and meets their needs. Google is committed to bringing services to users in a more seamless manner, whether through the device side or the cloud sideQ: Is there a way to quantify the overall change in participation, whether it is an increase in time spent or number of queries, due to some behavioral changes in SGE and Core Search, and whether this increase is reflected in both traditional search and more generative answers? Assuming we will hear more about certain products later this year, are there any specific areas or focus points that you would like us to pay special attention to?

A: Regarding the first question about search, there is currently no further information to add. Google has been conducting on-site experiments in the US and UK for some time, and the results show that all metrics indicate an improvement in user satisfaction. We have seen an increase in user engagement, but this will be a process that develops over time. Looking back, there were many questions last year, but we have always been confident in our ability to improve the user experience. We are very confident in our ability to manage issues related to service costs, latency, and commercialization. The future will evolve over time, but we are in a favorable position, and the team is working hard towards this, so I am very excited about the future.

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